Markets & Finance

Old Man Winter Chilled February Payrolls


Action Economics says the February U.S. jobs report should show a total payrolls drop of 50,000, with the unemployment rate edging up to 9.8%

The February U.S. employment report, scheduled for release on Mar. 5, should show U.S. nonfarm payrolls falling by a total of 50,000 on the month, depressed by the winter storm that blanketed the East Coast in the last week of February as the Bureau of Labor Statistics collected data for the report. Payrolls should get a boost from government hiring for the 2010 census, however. We expect that the storm resulted in a hit to payrolls of 100,000. For the Census, we expect a boost to federal payrolls of 50,000 that should leave a net 20,000 gain for government employment overall. We also see downside risk for the average work week in February, given the big 0.4-hour drop that took place in January 1996, although we are cautiously assuming just a 0.1 hour drop to 33.8 hours. We expect hourly earnings to increase 0.2% in February to leave the year-over-year growth pace at 2.0%, although this measure faces upside risk from the storm. The unemployment rate is expected to rise to 9.8%, following January's surprise dip to 9.7%. A comparison with a previous megastorm in January 1996 is telling. Making the assumption that the average of the January and February data in 1996 represented a fair estimate for the underlying trend, the 1996 storm subtracted over 200,000 from January payrolls and 0.3 hours from the workweek, but added 0.2% to hourly earnings. The latter figure likely reflects that some paychecks remained the same while hours worked was reduced—temporarily boosting hourly earnings. a 90,000 drop among goods producers

Here is a look at some of the other labor-related reports that factored into our forecast: The February ADP Employment payroll survey, scheduled for release on Mar. 3, is expected to reveal a 70,000 February drop in private employment. That follows a likely upward revision in the 22,000 January drop toward the 12,000 decline reported last month for private employment in the BLS report. Our February ADP forecast is consistent with an assumed 50,000 drop in nonfarm payrolls, given our assumed 20,000 rise in government employment, with a 50,000 census boost. The ADP industry breakdown should reveal a 90,000 February drop for jobs among goods producers, with a 20,000 factory payroll decline, alongside a 20,000 service-employment gain. Other employment-related indicators for February have been more mixed relative to the improvement seen in the second half of 2009. The weekly initial jobless-claims figures for February posted a sizable setback from prior improvement, though weather- and holiday-related distortions made the figures difficult to interpret. Initial claims have averaged 472,000 thus far in February, compared to average monthly totals of 466,000 in January and 455,000 in December. While this remains well below the high of 657,000 in March 2009, the measure was under 400,000 as recently as June 2008. We also saw a disappointing setback in various consumer-confidence measures in February. Notably, the University of Michigan sentiment index moderated to 73.6, from 74.4, and the Conference Board's Consumer Confidence index plunged to 46.0, from 56.5. Overall, while the various measures of consumer confidence have bounced from lows in early 2009, they remain at recessionary levels on an historic basis, and the breadth of declines in February adds to downside payroll risk on the month. Mixed labor market readings

The employment components of the available factory sentiment reports have mostly shown gains in February. A particularly impressive increase was seen in the employment component of the February report from the Institute for Supply Management, to 56.1, from 53.3 in January—reaching the highest level since January 2005. However, we also saw a drop in the employment reading from the Chicago ISM report to 53.0 in February, from 59.8 in January. Both labor market readings from the Empire State report posted small February gains, although we saw diverging swings in the two employment indicators from the Philadelphia Fed survey. The February ISM nonmanufacturing figures are due out on Mar. 3. These figures have continued to sharply underperform the factory-related sentiment data for the expansion overall, and in recent months in particular. The January headline reading rose only modestly, to 50.5, following a small increase to 49.8 in December, from 48.4 in November. Perhaps more important, the employment index from this survey edged only modestly higher in January, to a still-lean 44.6, from depressed prior readings of 44.0 in December, 41.6 in November, 41.1 in October, and a 31.1-cycle low in November 2008. These low employment readings remain consistent with triple-digit job losses in service sector employment, despite the stronger reported trajectory. Overall, the February payroll report will be subject to large distortions that will make the reported figures difficult to interpret, although analysts will attempt to look past the monthly hit from the storm and the more prolonged impact unfolding from census hiring. We expect measurable hits to payrolls and the work week from the storm—with a likely upward bias to the wage figures as well—alongside a general upward bias to the establishment and household data from the census. The impact from the storm will likely prove responsible for keeping the monthly payroll changes in negative territory, despite the slow but steady underlying improvement underway for labor market conditions overall.

MacDonald is director of investment research and analysis for Action Economics.

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